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AIG's lawsuit against BofA illustrates more Countrywide woes

August 8, 2011 | 4:44
pm

Bank of America was hit with more troubles Monday when AIG filed a lawsuit against the company alleging that "massive fraud perpetrated by defendants Bank of America, Merrill Lynch, and Countrywide ... has resulted in more than $10 billion in damages to AIG, and ultimately American taxpayers."

The company's stock plummeted 20% to $6.51 on Monday, partly because of the AIG lawsuit, which alleges that the defendants fradulently persuaded AIG to invest in 350 residential mortgage-backed securities at a price of more than $28 billion. Then, the suit alleges, the defendants misrepresented the quality of the mortgages by providing false data.

Many of the troubles stem from practices at Countrywide, which Bank of America acquired in 2008. But AIG indicates that other banks could also come under fire for similar practices, according to the following statement by spokesman Paul Herr.

Bank of America's fraud caused billions of dollars in damage to AIG and we are bringing this suit today to protect AIG and the taxpayers' stake in it. This is not the first lawsuit that AIG has filed against counterparties that have sought to profit at our expense and we anticipate that it will not be the last.

The lawsuit is the latest filed against Bank of America in recent months. In late July, 16 investors -- including the California Public Employees' Retirement System -- filed a lawsuit alleging that Countrywide had misled them.

Attempts to resolve the lawsuits have been mixed: New York Atty. Gen. Eric Schneiderman last week urged a state judge to reject an $8.5-billion settlement Bank of America had been negotiating. But BofA isn't taking the AIG accusations easily. Bank of America spokesman Lawrence Grayson fired back this:

AIG recklessly chased high yields and profits throughout the mortgage and structured finance markets. It is the very definition of an informed, seasoned investor, with losses solely attributable to its own excesses and errors. We reject its assertions and allegations.

Of course, AIG didn't like that. Herr responded:

It is disappointing but unsurprising that Bank of America continues to attempt to blame others for its own misconduct. Investors, no matter how sophisticated, were entitled to rely on its numerous written representations about the securities it sold. Now that it is clear that those representations were false, Bank of America must be held to account.

Bank of America's difficulty in resolving these mortgage issues has contributed to investor concern about the company, CLSA analyst Mike Mayo wrote in a note. It has also reinforced what many investors have long said about the 2008 acquisition of Countrywide: that it was a mistake.

"This lawsuit going after them just goes to show you that the company never should have done this acquisition," said Paul Miller of FBR Capital Markets & Co. "Regulators have never dealt fully with these bad assets."

Analysts say Bank of America will face more trouble until it can begin to resolve these mortgage issues more quickly.